Barrick Gold Stock: The More It Drops, The More I Buy (GOLD)

Barrick Gold (NYSE:GOLD) stock has been in the doldrums over the past month and a half, generating -21% total returns since early May:

That said, we believe that the sell-off is far overblown and that the stock is poised to deliver market-beating performance moving forward. In this article, we share three reasons why.

Reason #1: Bullish Outlook For Copper

Perhaps the most underappreciated aspect of GOLD’s value proposition is its growing copper business and the bullish outlook for copper prices long-term.

Constituting approximately 18% of the company’s total revenue presently, there is significant potential for its percentage exposure to copper to increase twofold or even more within the next 5-10 years. This projection is attributed to the ongoing development of several remarkable copper projects, notably Reko Diq and Lumwana Superpit, as part of its overarching goal to establish itself as the world’s leading gold and copper company.

Moreover, there is a strong chance that GOLD may accelerate its copper business growth even faster via a strategic merger or acquisition. For example, it was recently reported that it had expressed interest in acquiring First Quantum Minerals (OTCPK:FQVLF), which would have significantly boosted its copper production.

The reason we are bullish on copper prices stems largely from the ambitious multi-trillion dollar endeavor to decarbonize the global electricity grid that will cause demand for the metal to soar. In fact, copper is widely regarded as the “metal of the future” due to its crucial role in this transformative initiative. Currently, over 65% of the world’s copper is employed in electricity applications, and renewable energy technologies typically necessitate 4-5 times more copper than fossil fuel power generation.

Moreover, the tight copper supply situation and the need for higher copper prices to incentivize mining companies to invest in production and exploration contribute to our bullish outlook. The age and declining grades of existing mines, along with the political and social volatility in major copper-producing countries like Chile and Peru, further emphasize the supply challenges. On the demand side, copper plays a crucial role in green energy initiatives, with significant usage in energy storage, electric vehicles, and renewable energy infrastructure. The transition to clean energy and the growth of the electric vehicle market are expected to drive copper demand to unprecedented levels. Forecasts from Goldman Sachs, Bank of America, and Trafigura suggest that copper prices could reach new all-time highs in the near future.

When you combine GOLD’s strong copper production growth profile with our bullish outlook for copper prices and the leveraged exposure that miners enjoy to price increases in the underlying commodities that they produce, you get a powerful one-two combination for significant addition to GOLD’s bottom-line in the coming years.

Reason #2: Bullish Outlook For Gold

While copper is likely going to be its biggest growth engine moving forward, another reason to be bullish on GOLD is that its largest profit driver of today – gold (GLD) – also faces a favorable macro environment.

Gold has historically performed well during economic downturns, given its status as a safe haven asset. During recessions, the Federal Reserve typically reduces interest rates, further boosting the relative value of gold. While it is possible for the economy to achieve a soft landing without significant interest rate cuts, our portfolio already includes securities that would benefit in such a scenario. Therefore, diversifying our portfolio by increasing exposure to gold is a prudent move, as it has the potential to outperform in a meaningful recession where the Federal Reserve would need to make substantial interest rate cuts.

Moreover, gold acts as a hedge against inflation, which is expected to persist due to extensive deficit spending and high sovereign debt levels across many global economies, particularly in the U.S. and China. Even if inflation decreases due to an economic recession, the Federal Reserve is likely to lower interest rates, which – as we already mentioned – would be favorable for gold.

Finally, challenges to the dominance of the U.S. dollar and increased gold purchases by central banks further contribute to the positive outlook for gold.

Reason #3: GOLD Stock Is Undervalued

Last, but not least, we believe that GOLD stock itself is undervalued. Despite having some of the best assets in the world, a great CEO, and maintaining an attractive production profile for many years into the future, GOLD stock has significantly underperformed both GLD and the broader gold mining index (GDX) over the past year:

This underperformance has also been quite evident over the past month and a half:

As a result, there is a case to be made that GOLD is clearly undervalued at the moment.

In further support of the case for GOLD being undervalued are the following facts:

• The board initiated a $1 billion buyback in early 2022 response to the stock being “materially undervalued.” Today the stock is trading at a discount of over 10% to where it was at the beginning of 2022. Meanwhile, GLD is ~5% higher than it was at the beginning of 2022:

• GOLD stock is also deeply undervalued relative to its five-year averages. Its EV/Sales ratio is 2.78x compared to its five-year average of 3.60x. Its EV/EBITDA ratio is 5.50x compared to its five-year average of 6.97x. Its P/E ratio is 14.53x compared to its five-year average of 22.68x. As a result, there is clear potential for meaningful upside in the stock price from current levels.

Investor Takeaway

Between its high growth potential copper business, world class gold mining business that also benefits from macro tailwinds, and attractive valuation at the moment, we are very bullish on GOLD. Given the highly attractive risk-reward profile and the nice diversification benefits that it provides to our portfolio of high yielding dividend stocks, we rate it as one of our Top Picks of the moment.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.